Alberta should raise oil and gas royalties on new and existing projects, increasing the province’s revenue 20%, according to a report by a government-appointed task force empaneled earlier this year to examine the province’s royalty and tax structure.
The 104-page report, issued last Tuesday by the Government of Alberta, indicates that the province could collect C$2 billion (US$1.97 billion) annually by increasing the government’s total taxes and royalties on the natural gas sector to 63% from 58%, increasing taxes and revenues on the oil sands sector to 64% from 47% and increasing taxes and revenues on the conventional oil sector to 49% from 44%. The report also recommended placing a 1% severance tax on bitumen when it is selling as low as C$40/barrel, with the tax rising as high as 9% if prices reach C$120/barrel. The panel recommended that Alberta’s 1% base royalty rate, which is applied to oil sands projects during the pre-payout period, remain in place.
If adopted by the government, the changes would increase royalties for conventional oil and natural gas wells with high production rates and reduce royalties for the majority of low-production wells, the panel said. Price-related royalty caps would be raised “since world energy prices have overrun the old caps…[and] a production sensitive component will sustain the competitiveness of conventional wells through the coming years of declining production in that sector.”
The panel recommended “a mitigating fiscal program that the government can undertake immediately,” according to its chairman, former Al-Pac president Bill Hunter.
“We say ‘mitigating’ because our review revealed that Albertans do not receive their fare share from energy development and they have not, in fact, been receiving their fair share for quite some time. Royalty rates and formulas have not kept pace with changes in the resource base, world energy markets and conditions in other energy-rich jurisdictions.”
Alberta can remain an attractive investment destination if the changes are adopted, the panel said.
“Our goal is to ensure the royalty framework strikes the right balance, providing Albertans with a fair return while maintaining an internationally competitive system that allows the provincial economy to continue to prosper,” said Alberta’s Minister of Finance Lyle Oberg.
Included in the report were forecasts of rising oil sands production (up to 2,726 Mb/d by 2016 from 1,291 Mb/d in 2006) and falling gas (4,503 Bcf in 2016 from 5,268 Bcf in 2006) and conventional oil (396 Mb/d in 2016 from 538 Mb/d in 2006) numbers.
As part of the review, the six-member panel hosted a series of five public meetings across the province over the past eight months and accepted more than 300 submissions from Alberta residents, municipal leaders and stakeholders in the oil and gas industry. The government is scheduled to provide a formal response to the report by mid-October.
Greg Stringham of the Canadian Association of Petroleum Producers told NGI the panel’s recommendations represent “a wholesale change” to Alberta’s royalty system and its data were calculated using outdated costs and exchange rates.
“We’ll get that sorted through, but we want the government to understand that there are two areas that they want to focus on. One of which is confidence from the public that they are collecting enough, but secondly their objective was to ensure that they still have that competitive regime that attracted investment. And I think that this report doesn’t satisfy either one of those and they’re going to have to do some rebalancing before they make their policy decision, based on this and other information they get over the next month,” Stringham said. “There will be an opportunity here to certainly address some of the things that they put forward as recommendations, but also to correct some of the errors that are in the report.”
According to Stringham, the recommendations would do some damage to Alberta’s power industry, but “it’s still too early to calculate the actual quantitative results.”
The complete report and recommendations are available on the Government of Alberta website at www.finance.gov.ab.ca.
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